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Debt Planning and the 3 ABC’s to Reaping the Rewards of Rewards Cards

There are now rewards cards for virtually every spending category and style: points-based, cash-back (gas, supermarket, hotel), and, of course, frequent flier miles. Each has its own potential benefits and risks. With points-based cards, you typically earn 1 point per dollar spent (Ex. American Express Blue). Debt Planning: Cash back cards give you 1 to 5 % back on what you spend (Ex. Citi Dividend Platinum Select). Frequent flier cards offer miles in exchange for purchases, usually 1 mile for every dollar spent (Ex. Capital One No Hassle Miles).

So, how do you choose?

First, know yourself: if you typically carry a balance, rewards cards are likely not right for you—you’ll pay more in interest than the value of the rewards you’ll be able to redeem. Debt planning is the key here. Also, if you are late on a payment, some credit card companies forfeit rewards, raise your interest rates and/or eliminate interest rate grace periods. But, if you pay your credit card balances off in full every month and on time, then rewards cards have a lot to offer you.

Here are 3 Important Steps to Reaping those Rewards:

1. Pick a card that delivers rewards you’ll use… and can redeem.

Review where your money Actually goes, not where you think it may go. Chances are that a card that rewards your loyalty with free or discounted gas and groceries and restaurant dining will save you more money than one that give you plane tickets. And what about cold, hard cash?

Check redemption rules carefully Before applying for a rewards card of any type. Some cards limit how much you can earn; require you to spend a certain amount before rewards kick in; or offer a tiered rewards system. You’ll need to know which purchases qualify for rewards, and under what conditions those terms can change, to accurately estimate what you’ll be able to earn in a year.

Caveat: Be particularly wary of frequent flyer cards if you rarely fly, fly only during holiday “blackout periods”, or fly on short notice. Award seats are becoming an endangered species…especially as the airlines’ merge.

2. Once you’ve determined the category of rewards you want, shop and compare the cards currently offered.

All costs. Consider interest rates, annual fees, grace periods. Watch introductory rates. A card that’s set at 3% for 12 months is better than one that starts at 1.5% then pops to 5% after 6 months. Some cards also charge a fee to redeem rewards. Diner Club, for example, charges a 95 cent fee for each 2,000 points redeemed.

Check rewards expiration dates. Some rewards expire if you don’t redeem them within a certain amount of time. Additionally, most frequent flier cards apply blackout dates, seat restrictions, and expiration dates on miles. A few critical restrictions can significantly reduce the value of the rewards you’re hoping to receive.

If all of the above sounds like too much work, you’re not alone. Mint.com was specifically designed to make understanding where you really spend your money, and which credit card is really right for you easy and automatic. Mint compares your personal spending patterns and payment history to the interest rates and rewards offered by hundreds of US credit card companies.

Today, a Mint.com user who regularly pays her bills on time, and spends a lot each month on gas, supermarket and drugstore purchases, will likely be matched with a rewards card which offers cash back on those categories, such as Blue Cash from American Express®.

On the other hand, if she pays her monthly bills like her Cable, TV and Internet services on her credit card, those charges might represent her biggest expenses. If so, Mint.com will likely match her with a card like the Citi® Home Rebate Platinum Select® MasterCard®.

In contrast, a Mint.com user who typically carries a balance, but has a good credit rating, would likely be matched with a card currently offering 0% interest on balance transfers and new purchases for a year, one of which being the Chase Platinum Visa® Card.

6% rebate on Utilities, Cable/Satellite TV, Internet Connection and Telecommunication for 12 months, 1% on all other purchases.

Chase Platinum Visa® Card

0% APR on Balance Transfers and 0% APR on new Purchases for up to 12 months. 3% Balance Transfer Fee, capped at $99.

3. After you get your card, remain a savvy rewards consumer

Be Alert to policy changes. By law, credit card companies have to notify you if they change interest rates, but not if they change rewards policies. Open those envelopes and read the fine print. If policies change, call and fight back…or repeat steps 1 and 2, above!

Be resistant to the temptation to spend more. Some card companies notify you when you’re approaching a rewards threshold or when you’ve just earned or redeemed an award, tempting you to spend more money than you should. Don’t let yourself be led astray (from your budget).

Price Check the rewards offered. You may find that the products in the rewards catalogue are not worth what you spend to receive them. Compare one card’s requirement that you spend $2,000 to earn 2,000 points to get a free iron vs. spending $1,250 on groceries, drugstores and gas to earn 6,000 points in your first year with a Citi card which would get you a $50 gift certificate to Target. You could buy a $15 iron, and still have $35 more to spend!

Citi® Diamond Preferred® Rewards Credit Card. Rewards: $50 gift card – Receive 6,000 Bonus ThankYou Points after first purchase made within first 3 months. Five ThankYou Points for every $1 spent on purchases at supermarkets, drugstores and gas stations for 12 months and one ThankYou Point thereafter. One ThankYou Point for every $1 spent on all other purchases.

If you’re not certain of your typical monthly spending or what your cards currently charge in interest rates and fees and their grace periods, visit Mint.com, the online financial planner to find out in 5 minutes or less. Our Ways to Save page will provide you unbiased recommendations and quantify your potential savings and/or rewards.

Mint asks: How did you find your last credit card? And did you make a good decision?